Payroll Tax Withholdings For W2-Based Wage Earners:
If you’re a wage earner on a W2 with no other complicating tax circumstances on your federal individual tax return, the reason you may owe a significant amount of taxes at tax filing time is because your federal tax withholdings are too low. The closer you are to claiming zero exemptions on your W4, the less likely it is you will owe taxes at tax time. If you reside in a state with a state income tax, this same rule applies.
Take the time to visit the IRS’ tax withholding calculator: https://www.irs.gov/individuals/irs-withholding-calculator
To ensure W2 wage earners are at their “income tax break-even point” at tax filing time, we recommend our clients have higher tax withholdings on their paychecks. This typically means taxpayers will have to claim a few, if not zero, exemptions on their W4. The take away here is that if you routinely owe taxes at tax filing time, you can mitigate this scenario by claiming fewer exemptions on your paycheck.
If a taxpayer owes significant taxes year after year, the IRS may insist a taxpayer adjust their tax exemptions by issuing a 2801C letter, https://www.irs.gov/individuals/understanding-your-2801c-letter. This letter compels your employer to adjust your tax withholdings so that the IRS gets their tax money when it first becomes available, not when it’s convenient for the taxpayer at tax filing time. This is the reason why wage-earner bonuses are withheld at such a high rate: the IRS wants their money today, not tomorrow.